This is the second of three reports addressing the unregulated financial sector in regard to its use for the financing of terrorism. The first report discussed the anticipated shift from low-tech informal value transfer systems (IVTS) to increasingly high-tech IVTS.

It specifically explored mobile banking (m-banking) as an emerging path for TF. The third report will examine the regulatory challenges and possible responses to high-tech IVTS.

This report examines two additional and interrelated high-tech modalities that are vulnerable to TF: virtual currencies (or ‘e- currencies’) and massive multiplayer online games (MMOGs). Virtual currencies are digitized forms of money issued by private sector companies that function without the backing of national governments. Overlapping with virtual currencies are virtual worlds which are also known as MMOGs. MMOGs are virtual online worlds where hundreds of thousands of people can meet and interact simultaneously via the Wide World Web. Second Life is perhaps the most prominent example. Virtual worlds often contain unregulated economies in which substantial sums of money can be exchanged anonymously without government oversight. E-currencies and MMOGs are generally unregulated and the industries involved have heretofore not undertaken baseline Know-Your-Customer procedures. Therein lies the danger.

HIGH-TECH IVTS: VIRTUAL CURRENCIES

Unregulated or under-regulated virtual currencies on the Internet, similar to m-banking and other modes of high-tech IVTS, are most probably attractive to tech-savvy terrorists and insurgents that are intent upon moving and storing money for their attacks and infrastructures.

The use of virtual currencies to launder illicitly obtained money has been associated closely with transnational crime groups that take part in cyber fraud schemes involving the theft of private identification and credit card information. Customers can purchase virtual currencies from

Terrorist financial operatives have continuously demonstrated exchange agents online using an array of real or virtual that they are never far behind their professional criminal currencies. In order for customers to use virtual currency counterparts. for goods and services, they can use a debit card linked to a corresponding e-currency account. Issuers and The World Wide Web is the medium through which virtual exchange agents may issue debit cards that bear well- currency issuers and exchange agents operate in order to known credit card brands, which enables holders of facilitate global financial transactions for their customers. virtual currency to easily obtain national currencies and The issuers provide the virtual currency and usually back its goods and services at ATMs and retailers worldwide. value through precious metal holdings such as gold or platinum. These issuers also provide financial services similar The use of virtual currencies as a money laundering tool to what a brick and mortar banking institution would provide has trended up over recent years as criminals of all to its checking account customers. The exchange agents stripes gravitate towards online money laundering buy and sell virtual currency in exchange for other virtual strategies. The story of E-Gold, an Internet currency currencies or national currencies. exchange, is such an example.

A WORLD-CHECK TERRORISM BRIEF PAPER E-Gold is operated online and, until it faced US federal Cyber fraud is a well-documented typology that al- charges earlier this year, was physically registered in Nevis, Qaeda, especially in Europe, has used to raise money. a financial jurisdiction known for its lax regulatory oversight. E-Gold gave its customers an anonymous way to move Second generation British citizen and computer hacker, and store value backed against a supposed gold reserve Younis Tsouli, known online by his handle “Irhabi007” held privately in Europe and the United Arab Emirates. (Irhabi literally means “terrorist” in Arabic), was from Identity thieves, credit card fraudsters and child 2004-2006 a key conduit connecting Jihadist networks in pornographers in cyberspace all demonstrated an acute locations spanning from the US and UK to Abu Musa’ab predilection for the anonymous financial services which E- al-Zarqawi’s al-Qaeda network in Iraq.

Gold was reputed to provide. Tsouli mastered and spread knowledge of online For example, E-Gold functioned as the de facto bank and hacking techniques including encrypting sensitive data and communications, constructing Jihadist websites currency for some members of Shadowcrew, a global crime forum that operated in cyberspace as a virtual anonymously and, more germane to this topic, cyber market for stolen identification and financial information. fraud. US investigators revealed that Tsouli used stolen According to a 4 October 2007 US affidavit brought by the credit card numbers and identities to buy web hosting US Secret Service, Omar Dhanani used E-Gold to services and some 250 airline tickets with 110 different stolen credit cards. The illegal funds were used to reportedly launder between $40,000 to $100,000 a week for Shadowcrew from his Fountain Valley, California, home. expand the Jihadist presence online and probably to

facilitate international travel for terrorist training and The money laundering and terrorist financing risk in regard mobilization. to virtual currencies such as E-Gold was made clear in an A significant portion of Tsouli’s energies were devoted to April 2007 US Department of Justice indictment. The indictment accused E-Gold of money laundering and disseminating Jihadist ideology; however, his deputy illegal money transmitting from 1999 through December Tariq al-Dour was more singularly committed to the 2005. In the context of this indictment and the emerging group’s cyber fraud activities. At the time of al-Dour’s trend of illicit use of high-tech IVTS, a senior official in the arrest, in his possession were some 37,000 stolen credit card numbers in addition to the corresponding identity FBI’s Cyber Division said: “The advent of new electronic currency systems increases the risk that criminals, and theft information which included addresses, dates of possibly terrorists, will exploit these systems to launder birth and other private credit data. money and transfer funds globally to avoid law enforcement scrutiny and circumvent banking regulations Using phishing scams and computer programs such as Trojan horses, the group fraudulently charged more than and reporting.” $3.5 million to purchase operational equipment like

Terrorists continuously demonstrate that they will use the night-vision goggles, knives and prepaid mobile phones latest, most sophisticated criminal means to raise and for possible Jihadist recruits. move money. Therefore, practitioners must monitor this Tsouli and al-Dour mainly laundered the stolen money typology closely. It must be underscored that terrorists and insurgents often appropriate the illicit activities of their through online gambling websites. But as many terrorism organized crime counterparts in order to raise funds for experts specializing in the monitoring of Jihadist websites their attacks and infrastructures. have attested to an increased incidence of cyber fraud schemes within the Jihadist community, it is reasonable to conclude that virtual currencies could be and Like decentralized criminal networks, the al-Qaeda-led Jihadist movement is known to use the Wide World Web probably are being exploited by terrorists. extensively for financing activities in addition to other recruiting, radicalization and training purposes.

A WORLD-CHECK TERRORISM BRIEF PAPER VIRTUAL WORLDS, VIRTUAL CURRENCIES While China’s experience may not be a representative

case of the relationship between MMOGs and money An overlapping concern regarding virtual currencies is laundering or terrorist financing risk in general, it is their use in Virtual Online Communities (VOCs) or Massive reasonable to anticipate based on its example that an Multiplayer Online Games (MMOGs) such as Second Life, increased incidence of money laundering and terrorist World of Warcraft and many others. Second Life is an financing will likely be symptomatic of the continued MMOG that has been widely-discussed in the media due growth and popularity of unregulated virtual worlds, both to its popularity (it’s said to have five million users) economies and currencies. and its potential vulnerability to terrorist exploitation; specifically terrorist financing. Second Life has its own e- Although there is insufficient information available at currency named the Linden Dollar (LD). As of April 2007, present from which to draw any solid conclusions, more 270 LD equaled $1 in real US currency. With substantial research is needed to determine whether there is a commerce taking place in virtual real estate and possible correlation between the type of criminal commodities, Second Life is a veritable economic zone enterprise undertaken by a terrorist operative to raise within which about 1.9 billion LD or $7 million is in money and the predicate typology used to launder the circulation daily. For a terrorist to anonymously enter and ill-gotten gains. For example, the more high-tech the transact in this economy is not inconceivable. fraudulent activity, the more likely it would seem for the

financial operative to use a correspondingly high-tech The problem with Second Life is the very thing that makes it method to clean the money. Perhaps this would be due so attractive and popular: anonymity. Creating an avatar to an increasingly tech-savvy and younger generation or 3-D online identity in Second Life does not require of Jihadist sympathizers and operatives. Just as al-Dour validated identification information. As security officials and Tsouli used the Internet to steal money, so too did and terrorism experts indicate, the anonymity factor could they use the Internet to clean it. If this pattern emerges, enable terrorists to use Second Life and other MMOGs to then as cyber fraud becomes more prevalent as a covertly disseminate ideology, recruit and train. However, preferred terrorist financing typology, we should expect the most obvious risk stems from the ability for terrorists to to see increased use of virtual currencies by financial anonymously transfer virtual currencies, since this is a operatives as a predicate crime for online scams. possible TF typology that terrorists should be expected to exploit. CONCLUSION

Regulatory bodies and the financial institutions, bank Concern over the specter of money laundering and other and non-bank alike, hold the front lines in the fight illicit activities using virtual currencies in MMOGs has against terrorist financing. If the institutions that perhaps been most remarkably experienced in China. constitute the financial community fail to take strong, Chinese lawmakers have been vocal in claiming that the effective countermeasures to mitigate the terrorist exponential growth of online communities and MMOGs in financing risks inherent in emerging high-tech IVTS such China has resulted in more money laundering. The as virtual currencies and m-banking, the international lawmakers’ protests were followed by an order that community’s progress combating terrorist finance post- China’s central bank issued earlier this year. It stated that 9/11 could be substantially weakened. China’s central bank “is strengthening the standards and management of virtual currency used in online games” Therefore, one of the most salient questions facing and “strictly limiting” their use. World of Warcraft and legitimate stakeholders is: How to mitigate the risks of other MMOGs in which virtual currencies are exchanged terrorist abuse of emerging money transfer systems while are exceedingly popular among China’s estimated 30m at the same time realizing the promising economic gamers. Internet companies there are reported to have potential that could benefit both legitimate consumers launched at least ten virtual currencies as China's Internet and suppliers alike? population surged to 137 million by the end of 2006.

Don’t miss the final installment in next month’s T-Brief. John Solomon’s 3-part series on the inner workings of terrorist financing in the unregulated financial sector is a must-read for compliance professionals!